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The Lottery Exposed
By Jon Menaster | March 8, 2007
As we are all transfixed on the extremely exciting Mega Millions lottery jackpot (a record $370 million) I thought it would be interesting to see just how much money gets spent on lottery tickets.
Most people think that lottery tickets are a fun, exciting way to spend a buck or two - “Maybe I’ll strike it rich” or “Why not, it’s just a dollar” are two common thoughts that run through people’s minds when purchasing that pretty ticket through that all too easy to use machine (or even from that person! But don’t worry, those days are numbered, human interface is a thing of the past). But what are your odds of winning the lottery, and how else could that money have been spent?
According to Mega Millions Web Site, your odds are 1 in 176 MILLION. Those are some rough odds, if I do say so myself. (The odds of getting killed by lightning in the US are 1 in 3 million)
If you spend $1 a day on a lottery ticket, so $365 a year, every year from say 21 to 60, you would have spent $14,235 over the course of your life on lottery tickets. Using the magic of compounded interest, if you have invested $365 a year and received returns around 8% (not an unreasonable figure over a 39 year period in the stock market), you would end up with $101,532.71 (before taxes).
So which would you rather be - $14,235 poorer while holding onto a dream, or $101,532.71 richer and ready to enjoy that money at retirement?
My friend Dan used to tell me, and I quote, “I always thought the lottery was a tax on stupid people”. Couldn’t have put it better myself.
Topics: Money News, Retirement, Savings |
March 8th, 2007 at 1:33 pm
By using my trusted financial calculator, and by way of some IAR wizardry, I have calculated that an APR much more commensurate with the S&P 500’s historical returns (viz. 10.5%), that your $1 per day lottery habit would net you $205,168 by the time you turned 60 (assuming you started at age 21). This would seem to bolster your argument, n’est-ce pas? Bear in mind, that this calculation is strictly deterministic. The standard deviation of a portfolio returning 10.5% would probably be in the 16%-18% range. I don’t care to run the Monte Carlo sims to see what the full range of returns is. Point being, it is highly possible to turn $14,235 into over $200K in 40 years.
Now, here is my problem with all of this. First, $200K, 40 years hence, is the equivalent of $47K in today’s dollars. This fact alone undercuts the argument. Further, we ought to assume that the cost of lottery tickets increases with inflation (along with everything else), meaning a $1 ticket will cost, eventually, $4.36. In that case (more calculator wizardry, here), you are actually spending $32,283. Ah, yes, I hear you say, but, then, do we not also have to factor inflation into are deterministic rate of return on our investment. So true. With an annual inflation assumption of 3.75%, if we invested our lottery money in the stock market we would have $290,447 by the time we reach 60 years of age. In todays dollars, that is equivalent to $66,610, or a decent year’s salary for most of us. So, the crux of the issue, as I see it, is that we can, over the course of our adult-working lives, invest a year’s salary into the chance of winning a more than a lifetime’s salary. I might do it, if I could win the money upfront. However, what if you did win, but you won when you were 58? Great, but there went 40 years, wherein you could have been living the life o’ Reily. Most of your winnings will probably go to all of the greedy heirs who come crawling out of the woodwork. No, in the end, the best bet (and I am a betting man) is to forego the betting altogether.
March 9th, 2007 at 2:55 pm
Well, it looks like my mathematical abilities leave something to be desired. I applaud my colleague in taking my initial calculations to their proper conclusion. I had of course used simple figures to illustrate a point, but I hope the serious number crunching included in Kynikos’s comment broadens the picture that I had been painting to be more of a complete explanation.